Foolish Forecast: Inside Intel's Sales

It's a big day for Intel (Nasdaq: INTC) . Thursday afternoon, the chip maker will update investors on progress made during the fourth quarter, which is underway. Expect the announcement to draw more than a little attention.

Wall Streeters will be tuning in to find out whether recent enthusiasm for shares of semiconductor stocks such as Texas Instruments (NYSE: TXN) and Advanced Micro Devices (NYSE: AMD) is, indeed, warranted. Intel, you see, is the so-called bellwether of the sector. If it raises guidance significantly, then a tidal wave of goodwill should lift all silicon-clad stocks traversing the market's choppy seas.

More likely is that investors will be disappointed. That's because the Street's pie-in-the-sky crowd has already set the bar pretty high. According to data available at Yahoo! Finance, it's looking for the chip maker to book at least $10.6 billion in Q4 revenue. Intel said in Q3 that it would book $10.2 billion to $10.8 billion in revenue, for a midpoint of $10.5 billion. Raising guidance, then, would be a non-event unless Intel projects $10.7 billion or better. And merely confirming prior guidance could push the shares downhill faster than me on the black diamond ski run at Vail (which is, uh, pretty fast), as the bar's been set pretty high on expectations.

I'm rooting for the latter. Why, you ask? Because the sales estimate isn't what matters for buy-to-hold shareholders. Remember last year. For the fourth quarter and full-year 2004, Intel broke sales records. Which sounded great, till you realized that profits ran lower. Margins, too, were squeezed. Inventory problems and heightened competition from AMD were mostly to blame. The right question to ask, then, is this: Has anything changed? In my estimation, existing guidance indicates that the answer is yes.

Take a look at the table at the end of this story. During last year's Q4, Intel paid $1.21 for every new dollar of sales over the same quarter from the previous year. That helped explain the drop in profits. This year, Intel says its gross margin for Q4 should be 63%. Do the math and you'll find that, if true, Intel's cost of sales would be lower this year than last, but with revenue going higher by at least $900 million. Nice.

I know what you're thinking: What about AMD? Hasn't it caught fire in the x86 server market? Isn't it putting pressure on Intel? Yes and yes. But Intel's business is more diversified than just x86 chipsets. And liking AMD's stock doesn't prohibit you from finding value in Intel. Unless, of course, you treat stock certificates the way a sports fan treats baseball cards. (Hint: Don't do that.)

Bottom line: Intel's stock may take a dive Thursday for all the wrong reasons. Which may be as close as you'll get to a Christmas gift from old Mr. Market this season.

Quarter

Sales

Year Prior Sales

Y-O-Y New Sales

Cost of Revenue

Year-Prior COR

Y-O-Y Cost of Revenue

Cost of Each New $ of Sales

Q4 05*

$10,500

$9,598

$902

$3,885

$4,221

- $336

$0.00

Q3 05

$9,960

$8,471

$1,489

$4,012

$3,752

$260

$0.17

Q2 05

$9,231

$8,049

$1,182

$4,028

$3,269

$759

$0.64

Q1 05

$9,434

$8,091

$1,343

$3,836

$3,221

$615

$0.46

Q4 04

$9,598

$8,741

$857

$4,221

$3,185

$1,036

$1.21

Q3 04

$8,471

$7,833

$638

$3,752

$3,275

$477

$0.75

Q2 04

$8,049

$6,816

$1,233

$3,269

$3,348

- $79

$0.00

Q1 04

$8,091

$6,751

$1,340

$3,221

$3,239

- $18

$0.00

*Figures in millions. Estimates based on Intel guidance; if the marginal cost of additional sales is less than $1.00 (negative), it is reported as $0.00.

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Fool contributor Tim Beyers hasn't hung a pennant in 20 years. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.

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